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What is a 0% or interest-free finance deal?

The motorcycle industry is catching up with the car industry when it comes to finance offers. You’ll see lots of dealers talking about Hire Purchase (HP) and Personal Contract Purchase (PCP) finance. More and more manufacturers are now offering 0% finance deals.

How does 0% finance work?

Essentially interest-free finance is a personal loan that you don’t pay any interest on. If a £10,000 bike is being offered with 0% finance, you’ll not pay any interest on the amount you borrow – so in most cases you’ll pay back £10,000 over the duration of your loan.

The dealer will usually ask for a deposit and then you’ll pay a series of monthly payments until you’ve paid off the total amount of the loan.

Why do motorcycle manufacturers offer interest free finance?

0% finance is a good way for dealers to shift stock. Often bikes being offered with zero interest deals fit one of the following criteria:

  • They’re not as popular as the dealer or manufacturer predicted
  • The offer is on a certain colour scheme that’s not that popular
  • There’s a new model just around the corner
  • The dealer or manufacturer wants to hit their internal sales targets

From a dealer’s perspective, they’re often looking to hit sales targets. Selling a few bikes with an attractive finance offer might mean the dealer doesn’t make much money on those few sales but they may help the dealer hit their target, unlocking the bonus set by the manufacturers or in many cases, the finance companies.

It sounds good, so what’s the catch?

List price

It’s very rare that a dealer offers an interest-free finance deal on an already-discounted motorcycle. So the finance might not save you any money but the structured monthly payments and lack of capital interest might make the difference between you being able to afford a new motorcycle now or having to save up for it to buy it with cash at a later date.

Larger deposits

It is also very likely that a bike with a 0% finance deal will require a larger than normal deposit – sometimes as much as 50%. So in that case, it only benefits you if you already have a sizable chunk of cash burning a hole in your pocket.

This large deposit mitigates the risk for the dealer and the finance company. The dealer gets a sale and is one-bike closer to their sales target, the majority of the bike is paid for and they have a customer they can target with other offers further down the line. “I’ve noticed your payments are nearly finished, madam. Why don’t we get you onto a shiny new bike for just a little bit more per month…”

For a dealer, this is gold dust.

A working motorcycle finance example

So let’s take our £10,000 motorcycle example with a finance offer over 35 months which is a typical term.

Hire Purchase (HP)

With a 0% deposit, 0% finance offer (very rare!), with straight Hire Purchase you’d pay £285.71 per month for 35 months and the bike is yours. Total paid: £10,000.

On a £10,000 bike with a 50% deposit, you’d pay £5,000 upfront then 35 monthly payments of £142.85 and then the bike is yours. Total paid: £10,000

Personal Contract Purchase (PCP)

If you were looking at a £10,000 bike with a 0% deposit, no dealer contribution (discount) and interest-free finance, with a final balloon payment of £6,000, then you’d pay approximately £115 per month for 35 months (because you’re paying off the depreciation of the bike which is £4,000, plus interest on the book price of £10,000 hence the lower monthly payments).

At the end of this term, you can then either pay the final balloon of £6,000 and the bike is yours, or hand the bike back and – subject to wear and tear – pay nothing more.

If this PCP option was available and you bought the bike at the end of your term you’d pay £10,000. It’s worth bearing in mind that zero-deposit, 0% finance PCP deals are almost unheard of – in the majority of cases you’ll need a large deposit and there will almost always be APR interest.

A final word of caution

Remember, any finance, even with no interest, is still a loan and will be subject to you passing credit checks. If you default on your payments, the bike may be repossessed and you’ll likely face large fines and fees to settle the balance, plus this may affect your credit rating and your ability to be approved for future credit.

If you’re taking out a 0% finance deal because you’re strapped for cash, ask yourself: do I really need a new motorcycle? What if I lose my source of income? Will I be able to meet the monthly payments.

Zero percent finance is attractive but please, tread carefully.